The Financialization of Nature; Or, Neoliberal Environmentalism at Work

The financialization of nature is the process of replacing environmental regulation with markets. In order to bring nature under the control of markets, the planet’s natural resources need to be made into commodities that can be bought and sold for a profit. It is a means of transferring the stewardship of our common resources to private business interests.
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Since the economic slowdown of the early 1970s, the financial sector has played an increasingly large role in our economy. The finance sector’s share of domestic corporate profits rose from below 16 percent in the 1970s and 1980s to as high as 41 percent in the decade before the 2008 financial crisis. In the wake of the financial crisis, after seeing its profits plummet, the sector is back to accounting for about 33 percent of domestic corporate profits.

As the finance sector grew in size, it also grew in strength. Policies in Washington came to reflect the interests of financial actors. The 1980s saw a push for deregulation. The Reagan administration pursued deregulation of industries ranging from energy companies to banking. The move for deregulation became broadly bipartisan in the 1990s and culminated in the passage of the Gramm-Leach-Bliley Act of 1999, which removed regulations put in place during the Great Depression to protect banks from the hazards of speculation.

At the same time, so-called market-based approaches to regulation became popular among policymakers. In the place of regulatory structures that prohibited certain activities, policymakers began to favor providing economic incentives for promoting or discouraging certain behaviors. Perhaps the most prominent example of this is the push for cap-and-trade schemes. Touted as a market-based solution to disincentivize pollution, it actually sells the right to pollute, given that a company can front the cost to do so.

Cap and trade is a radical shift in how environmental regulation works. Traditional environmental regulation relies on permission, prohibition, standard setting and enforcement to meet environmental ends. Regulated sectors need to meet the standard set or face penalties. Most classic U.S. regulation, including the Clean Air Act, first enacted in 1970, and the Clean Water Act, first enacted in 1972, fits that mold.

In contrast, cap and trade attempts to create markets in actual or potential pollution to create an economic incentive to pollute less. Many, but not all, systems also include a cap, a system-wide limit to the amount of pollution that can be emitted. Instead of limiting what an individual plant may emit, each polluter is given an allocation of emissions. If it doesn’t use up that allocation in a year, it may sell those emission allowances to another company that polluted more than its allocation.

Those who oppose simply regulating pollution commonly propose cap and trade as a more “free market” approach to environmental problems. The market is used to allocate costs, rather than using the performance-based indicator of meeting a regulated standard. Proposals for cap and trade systems range from using them to limit greenhouse gases to using them to control water pollution.

What all of these cap-and-trade systems have in common is the creation of a new commodity – the right to pollute – that is then sold in a new market. The credits or allowances for the amount of pollution emitted become the private property of the polluter. Financial actors can then build speculative markets that bet on the future price fluctuations in those credits. Because pollution under the cap-and-trade system is supposed to be controlled by the price of the credits, in so far as the financial markets determine that price, regulation of pollution is transferred to those markets.

The financialization of nature is not about protecting the environment; it is about creating ways for the financial sector to continue to earn high profits. Although the sector has begun to rebound from the financial crisis, it is still below its pre-crisis levels of profit. By pushing into new areas, promoting the creation of new commodities, and exploiting the real threat of climate change for their own ends, financial companies and actors are placing the whole world at risk.

Mitch Jones works on environmental and international trade issues.

 


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